CFA Practice Question

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CFA Practice Question

In contrast to the Capital Asset Pricing Model, the Arbitrage Pricing Theory ______.
A. uses risk premiums based on micro variables
B. specifies the number and identifies the specific factors that determine expected returns
C. does not require the restrictive assumptions of the market portfolio
Explanation: Assumptions:

Asset returns are described by a factor model (note that the number of factors is not specified).
There are many assets, so asset-specific risk can be eliminated.
Assets are priced such that there are no arbitrage opportunities.

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